exercise:6917d25828

AAdmin

Jan 15'24

Exercise

Determine which of the following statements is NOT true with regard to underwriting.

Life insurance policies are typically underwritten to prevent adverse selection.
The distribution method affects the level of underwriting.
Single premium immediate annuities are typically underwritten to prevent adverse selection.
Underwriting may result in an insured life being classified as a rated life due to the insured's occupation or hobby.
A pure endowment does not need to be underwritten to prevent adverse selection.

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AAdmin

Jan 15'24

Solution: C

Answer C is false. If the purchaser of a single premium immediate annuity has higher mortality than expected, this reduces the number of payments that will be paid. Therefore, the Actuarial Present Value will be less and the insurance company will benefit. Therefore, single premium life annuities do not need to be underwritten.

The other items are true.

A: Life insurance is typically underwritten to prevent adverse selection as higher mortality than expected will result in the Actuarial Present Value of the benefits being higher than expected.

B: In some cases, such as direct marketed products for low face amounts, there may be very limited underwriting. The actuary would assume that mortality will be higher than normal, but the expenses related to selling the business will be low and partially offset the extra mortality.

D: If the insured's occupation or hobby is hazardous, then the insured life may be rated.

E: If the purchaser of the pure endowment has higher mortality than expected, this reduces the number of endowments that will be paid. Therefore, the Actuarial Present Value will be less and the insurance company will benefit. Therefore, pure endowments do not need to be underwritten.